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A company is launching a new product. In order to manufacture this new product, two types of labour are required skilled and semi-skilled. The new producti requires five hours of skilled labour and five hours of semi-skilled labour.
A skilled employee is currently paid $10 per hour. Should he/she work on the new product a replacement would have to be obtained at a rate of $9 per hour, for the work which would otherwise be done by the skilled employee. The current rate for semi-skilled workers is $5 per hour and an additional employee would be appointed for this work.
What is the relevant cost of labour to be used in making one unit of the new product?
Author is not taking contribution lost for skill labor. He is adding only the cost of labor hired skill and unskilled labor. Which give him total of 70.You can reliable find a relevant cost by thinking how a decision has changes cash flows.
Existing work is still carried on. The only changes to cash flows are the extra 5 hours paid at 9 and an additional 5 at 5.
If existing work had been given up, lost contribution would be relevant.
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